Two ways the Bank of England wants to cool the housing market

The Bank's Financial Policy Committee confirmed today that it will introduce measures to calm house prices. Although, as Mark Carney pointed out, 'we don't target house prices - we care about indebtedness'.

by Emma Haslett

Published: 26 Jun 2014

Last Updated: 02 Jul 2014

Mark Carney spent yet another morning being grilled by MPs today: this time, the topic was financial stability, and how the Bank of England plans to create it. Right now, said Carney, the biggest threat to stability is household indebtedness. And although the Bank doesn’t believe it poses an ‘imminent risk’, we’ve seen in the past ‘how quickly responsible lending can turn to reckless’. Eeek.

As Carney pointed out, the Bank ‘[doesn’t] target house prices - we care about indebtedness’, but the amount families are borrowing to buy houses is of particular concern to the bank, particularly with an interest rate rise on the cards. So the Financial Policy Committee, the new committee whose raison d’etre is pretty much to make sure the economy doesn’t explode again, has recommended two ways to cool the housing market:

1. An affordability test where lenders have to work out whether borrowers would still be able to pay off their mortgages in the event that interest rates rise by 3%.

2. A new rule whereby no more than 15% of the people a bank lends to can borrow more than 4.5 times their income. Which is all well and good until you hit London, where 19% of loans are more than 4.5 times income, according to the Council of Mortgage Lenders.

Will it work? Difficult to say. Carney himself conceded that the recommendations are a ‘graduated and proportionate response’ to rising house prices, ie. are going to be slow to have an effect. But if it helps to cool the market, pressure to raise interest rates will ease, which will keep the government happy in the run-up to the election...